CRA: How Big is Small?
For the first time since the enactment of CRA, the agencies are acting without uniformity. The agencies have not come to agreement on the appropriate size cut for a small and large bank category in CRA. Two agencies, OCC and FRB, have announced their intention to make no change to the $250 million limitation on small banks for CRA evaluation purposes - so far, anyway. Both FDIC and OTS are looking harder for ways to reduce regulatory burden.
FDIC has issued a new proposal, taking into account the comments received in response to the notice of proposed rulemaking (NPR) published earlier this year. The FDIC has several interesting points that banks should consider and use.
At the heart of the small-bank / large-bank question are two issues: how many banks would experience measurable burden relief, and what impact such relief might have on investment in the community if the size of small banks is increased?
Community advocates commented passionately against changing the size definition of large bank. Their arguments avoided discussing burden and emphasized the importance of the investment test and community development lending to the economic health of communities. Without this investment, they argue that communities would be harmed. The argument is a theoretical one, not supported by a quantification of the amount and importance of community investments generated by banks in the debated size category.
In the context of these arguments, the FDIC is seeking a way to balance the relative burden on banks and the value of investment to communities. The proposal would make several key changes. First, the small/large bank definition would be moved up to $1 billion. This change would increase the number of banks under the small bank test but make proportionately little change to the proportion of bank assets in the small bank category.
When the current regulation was adopted in 1995, banks subject to the large bank test comprised 19.6% of the number of insured institutions and held 86.2% of the industry's assets. As of March 2004, the number of banks having $500 million in assets or more constituted 12.1% of the number of insured institutions and held 89% of the assets. Another way of looking at this would be that even with an increase in the asset size of a large bank, more bank assets would be subject to the investment test than was the case in 1995.
As a second component to the FDIC proposal, banks between $250 million and $1 billion would be subject to a modified community investment test that would include making community development investments, loans or services. The test would be more flexible than the large bank investment test. The middle category test would review the bank's record of meeting needs of its assessment area through a combination of community development lending, qualified investments, or community development services. The precise nature of the investment activity would be up to the bank based on the bank's capabilities and an assessment of the community's needs. This investment, loan, or service activity is designed to ensure that communities continue to benefit from community development activities without placing such a specific requirement on financial institutions.
The FDIC is also seeking comments on other ways to measure community development. Whether they meant to or not, this opens the door to ideas that are more directed to economic development that will have a future positive impact on low- and moderate-income populations and areas. At present, the regulations require an immediate and direct connection to the benefit of low- and moderate-income. This tight connection rules out many economic development activities that create a stronger economy which benefits all income categories.
CRA contains a presumption that the economic development needs of middle- and upper-income projects will be met without any prodding from regulators. To create balance for all income groups, CRA forces attention to low- and moderate-income needs. As implemented, the regulatory agencies have placed emphasis on exclusive benefits for middle- and upper-income categories in addition to low- and moderate-income go without recognition. Because of that, they may also go without bank financing. The FDIC proposal opens the door to possible consideration of such projects, especially in rural areas.
On the negative side, this regulatory split represents the first time since the enactment of CRA that the agencies have decided to go separate ways. Until now, the agencies have placed a priority on uniformity of the CRA regulations issued by each agency. Now, however, the uniformity is shattered. If each agency goes forward with their current position, banks of $450 million or even $900 million would be examined differently and held to different measurements based on who regulates them. Two banks of the same size, located in the same market but regulated by different agencies, would effectively have different CRA requirements.
The act itself does not mandate that the agencies develop identical regulations. However the agencies decided when first developing regulations that uniformity was important. The current regulations and the several earlier versions are the product of many hours of coordination between the four bank regulatory agencies. Now that uniformity - and willingness to work together - may be gone.
This FDIC proposal has only a 30 day comment period. If you like what the FDIC has proposed, get your comment letter in. Be sure to explain why the proposal would be of benefit to both your institution and your community. In the meantime, the OCC is "exploring means of relieving the regulatory burdens on community banks while supporting community reinvestment by these banks." So send a copy of your comment letter to the OCC. Burden imposed by lack of uniformity is one of the issues on which you should comment.
ACTION STEPS
- If you are a "large bank" under the current regulation, review the CRA investments made over the past 3-4 years and consider their importance to the community.
- Then consider what your institution could have done instead with that money and compare the benefits to the community.
- Look around your community and identify five loan, investment or grant needs. If any do not currently get CRA "credits" write a letter explaining why the service is needed and why it should get favorable CRA treatment.
- Review economic development proposals and plans of your state and local governments. Identify projects that fail the CRA low-income test but would benefit all members of the community, including low-income. Describe these projects in your comment letter.
- Comment!
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 9, 9/04
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